5 Tips For Planning Your Annual Budget

Even in the extreme uncertainties of the current business climate, it is still possible to establish your company’s 2022 budget and goals. In fact, it may be more important now than ever, as this roadmap for your business can provide the stability your team is otherwise lacking.  

The annual budget—which should be reviewed throughout the new year—helps to coordinate resources, set limits on costs, and improve cost allocation.

A recent survey conducted by Clutch across 335 small businesses found that 54% of owners see value in keeping a budget and were able to anticipate a profitable business environment in 2021. Yet, 50% fail to consider budgeting as an essential business practice.

The reason? Business leaders may view annual budgeting as a time-consuming task that yields little or no return. Often, businesses set absolute budget targets that are difficult to attain with changes in market conditions. At the same time, it is a challenge for many to revise budgets or predict long-term business outcomes in detail.

How can you tackle these annual budgeting challenges, instead seeing the budget as an essential tool for forging a brighter future? Here are five tips:

1. Set relative targets

Technology is rapidly advancing, and the market has significant instability: businesses need to build flexibility into their budgeting and forecasting. Rather than fixing overly detailed budgets for a year, focus on monitoring business circumstances in real time and shift resource allocation as needed.

For example, you can leverage continuous budgeting to tackle situations that haven’t been planned. For some companies, this may mean allocating additional resources to marketing efforts when there is an increase in sales. For others, it could be about allotting a certain percentage of revenue to salary as opposed to assigning a fixed amount.

Having flexibility within the budget helps managers prioritize correctly in variable-cost categories such as hiring, internal events, travel, and marketing.

2. Build an adaptable budget strategy

Remember: budgets do not need to be perfect. You can identify variance in the budget by setting monthly benchmarks, then adjusting the budget as you hit or miss those targets. This helps eliminate some of the risks in your budget and take advantage of opportunities as you progress from one quarter to the next.

As you review the budget versus actual statements and understand your financial state for the next quarter, ask:

• What is the potential return and risks of large investments in our pipeline?
• Should we reallocate such investments towards other needs we’ve identified in the last quarter?
• If there are relatively low returns on current initiatives, do we need to continue to invest in them going forward?

Answering such questions helps implement scenario-based budgeting, simplifying planning for plausible variance. A budget tool that helps gain insight into actual performance versus planned performance will also help get buy-in from the leadership team for these investment decisions: decisions that help companies scale or simply stay afloat in difficult conditions.

3. Perform stress tests

When setting the annual budget, CFOs and CEOs need to revisit the scenarios and decisions made in the previous year. This is especially critical today, when most businesses have spent a substantial amount of capital in responding and recovering from pandemic-induced uncertainties. It is important for finance teams to reconsider projects that were launched during the crisis and test their relevancy in the current times. 

For instance, organizations can test how an omnichannel strategy impacted sales or how a new product launch impacted business performance. Such self-governing stress tests can be performed through accounting software that helps compare various initiatives or scenarios to profit and loss (P&L) statements. This enables companies to strategically plan the budget and determine which moves to pursue according to the growth trajectory. 

4. Shorten the budgeting process

If you find it challenging to complete the budgeting process in time, start with a reference point. This can be the P&L statement from last year. With the help of accounting and finance experts, you can break down P&L statements and link them to operational KPIs to set strategic directions and financial ambitions. 

At Accelerated Growth, we help our partners list all key revenue and expense drivers to give them perspective on what matters most in the coming year. As you progress throughout the year, we benchmark your monthly performance and account for seasonality or non-linear growth projections to build forward-looking projections based on year-to-date returns (YTD). This not only helps the fast-track the budgeting process, it illuminates opportunities to accelerate progressive trends and counterweigh detrimental drifts.

5. Make budget part of company-wide discussions

As businesses get back to normal, it will be critical to have budgeting processes and agile reinvestment-related discussions with your leadership teams. These will help get the buy-ins for high-level business objectives, cost optimizations, and resource provisions.

Budget-based goals can also be shared with cross-functional teams to set the expectation for financial performance. Once the information is shared contextually and incrementally, it becomes easier to set individual performance targets for achieving certain business outcomes.

By culturally reorienting the budgeting exercise focus from control to collaboration with the business functions, you can focus on upping the value of functions that are performing well.

Also, engineering a budget-planning process that includes the participation of employees at all levels encourages greater accountability and support for the budget. While the front-line team members can deliver more realistic business performance data, the planning team can help interpret positive and negative business trends. Hence, a more collaborative approach can trigger discussions and insights which are not only more credible but also better able to harness market uncertainty to drive business performance.

 

Given the continued external instability, predicting year-round business strategies can be tough. Fortunately, if done right, an annual budget helps define the expected path while assessing uncertainties, allowing organizations to have timely and accurate reporting to review decisions and focus on moves that help build resilience and further growth.